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5/10/1988 - untitled by William L. Melvin

NOT FOR PUBLICATION WITHOUT WRITER S CONSENT INSTITUTE OF CURRENTWORLD AFFAIRS May Cambridge UK WLM I Peter Bird artin Institute Current World Affairs West Wheelock Street Hanover NH 03755 Dear Peter For those readers Institute newsletters shared conversations correspondence I suppose brief explanation order I first heard Institute search Andean Fellow October after returning months volunteer service Catholic Church northern Peru The thought I could build prior experience Andes excited enough fashion loose design study Andean youth coping poverty The apparent social mobility moved think possibility regional conflict exemplified Colombia Sendero Ltuinoso Peru merltsd serious investigation Then I concerned impact Liberation Theology Not since Protestant Reformation Century theological movement stirred constant controversy beyond altar Throw violence distorted economies brought trade might advised flames A different course action instead Why advantage public forum afforded newsletters table discussion difficult problems solution Andes The Right Left Latin America politicized every picayune detail existence wonders whether there compromise Yet seems policy makers responsibility Andes avoid boiled equating middle cowardice Well Fellow appointed learn about indigenous societies Andes postmark first letter Cambridge England Simply world broadened considerably In months between first appointment I worked international trade Stewart Stewart The represented traditional American industries order bring antidumping counter vailing suits against foreign competitors engaged unfair William Melvin Institute Fellow studying Indian societies Andean affairs WLM I Page trade practices As consequence I developed practical pragmatic understanding internatlonsl business level playing field which played I surprised Third nations competed another market share diverse industries fiercely their First World counterparts I especially found exploitation natural resources I forced admit although I written about nationalization Bolivia mines rationale reality I nothing mining marketing minerals international market Thls despite mining tragedy Andes since Century Pizarro conquered Incas search E1 Dorado In particular I became intrigued spectacular collapse Internat Tin Council October Founded during great faith international institutions ITC hailed example excellence effective arbitration between producers consumers often volatile commodity mazkets Mr Pieter Konlng called London Metal xchange capacity buffer stock manager BSM Council informed Exchange Council broke could forward trading commitments Trade contract opened falling quickly L8140 below floor price L8500 which Konlng obliged defend under terms VIth International T Agreement Trading contract immediately suspended Rumors circulated months Council although ostensibly funded member governments stralts Now everyone fears realized Peat Marwlck calculated Council debts L900 million controlled hysteria Since Exchange operated prlnclpal market instead through clearinghouse brokerage house could position secure The houses caught unfulfilled warrants obligated balance Exchange membership contracts other metals traded copper aluminum nickel silver A default caused crisis might knock effect around Exchange For three months bankers brokers bureucrats trled rescue Council Finally evening March Indonesia Thailand important producers refused agree designed debts ITC orderly manner release market slowly avoid price The Exchange declded reopen contract enough settle price L6250 The price LlO O00 which topped earlier distant price L3672 quoted European market Amsterdam The contract dlsapeared Exchange replaced waves litigation designed recover losses suffered brokers bankers after collapse WLM I Page This havoc wreaked London Thousands miles Bolivian sierra collapse Council proved immediate disastrous Victor Paz Estenssore assumed office months before inheriting economy ravaged inflation mismanage state bureaucracy Victor Paz committed rationalizing bloated puolic sector His obvious target organization helped create Revolution Corporacion Minera Bolivia COMIBOL Even price soared above L10 Bolivian moved gingerly world markets The location mines invariabl above level Whereas Southeast Asia found largely alluvial deposits mined dredge gravel Bolivian miners engage extraction These difficulties Bolivia dubious honor producing womld expensive L6500 From brought anywhere export earnings It before natural surpassed country number generator foreign exchange In brought revenues ountlng million million The decline spurred ITC collapse temporary On exports assuming liberal average L4 revenues exceed million Estimated production dipped lower matched lower prices For estimated production average price estimated L4 Bolivia earned million Emphasis placed estimated nature figures since I calculated dollar Malaysian ringgit prices quoted Kuala Lumpur market Nevertheless candJ trend export earnings moved dramatically downward Bolivia needs foreign exchange external payments Perhaps importan played COMIBOL Bolivian economy Before ITC collapse parastatal employed dependents numbering The crisis forced Paz governent accelerate rationalize mining industry March State Department assured miners prospect return iners severance buyouts little knowledge invest money great miners clustered around La Paz Cochabamba Those makeshift cities either headed Chapare Beni trade stayed behind mining centers better alternative With these facts I London month Had Bolivia victim rapacious market speculation London Metal Exchange In sense concern recent however futures trader indeed prologue Futures trading benchm producer pricing In predictsbillty WLM I Page pricing trends allows countries Bolivia decisions about investment exploration commodities sector alternatively shutdowns layoffs I pretend account which I forth below perfect The amount money involved litigation prestige embarrassment stake parties litigation serves facts cloaked secrecy I doubt person I spoke possessed reasons telling story On June International Tin Council succeeded squeezing market For short sellers Exchange reckoning seemed Banking imminent collapse ITC fueled rumors insolvency brokers obligated provide buyers possess Three months earlier Pieter Koning advantage ability below M floor price process absorbed available market He ready seller short market According sources ITC LME market oversold extent simply exist They nowhere except paper It perfect corner One insider bluntly remarked The Council xchange short curlies They Council could charged price LlO0 O00 Of course Buffer Stock Manager would would brokers dearly playing against Council L4E rules imposed limit backwardation situation arises price metal greater forward price The LME suspended trading after second climbed L850 The Exchange rejected Koning offer O00 illiquid market LIO Instead LME Committee avene capacity governing Oody Exchange imposed LgO limit The angered ITC brokers Exchange either covered their shorts forced single prompt lending before change To squeeze evoked memorles Malaysla failed attempt corner market through Rich Though similarities between events exist important dferences remaln In alaysa attempting solidify position market driving price In June corner reflected distorted artificial market become three years VIth International Tin Agreement Only months later Council apart raising serious doubts about future international commodity agreements To fully understand ITC collapse Bolivia beleaguered economic position crisis further Efforts stabilize price began sgniflcantly formation Bandoeng WLM I Page Pool Depressed commodity prices after World War I Federal Malay States Netherlands East Indies considerable overproduction This convinced governments until world stocks drawn sufficiently raise price Whether buffer stock actually succeeded sending price upward debata Worthy however Pool ended producers realized measure control stocks partial control price The other significant attempt influence pricing before World War II International Tin Control Scheme This evolved unsuccessful Tin Producers Asso ciation formed after stock market crash The earlier group included three major Bolivian producers Patino Arramayo Hochschild When consumption United States recover Great Depression Scheme forth large Patino active measure stabilize production pricing Bolivia Siam Nigeria Netherlands East Indies Federal Malay States represented Agreement create centr managed buffer stock bought defend target price L160 Regardless agreed production quotas national interest prevailed By attempt these countries support price beginning unravel problems areement instructive Simon Patino obvious interest maintaining price control Production costs Orient about L70 cheaper allowing Asians flexibility Patlno purchasing shares Malayan mining companies overt maneuver force Asian producers comply quotas designed producers created considerable An excerpt She T Imes Ma May The protagonists control least excellent propagandists never opporbunlty impress everybody appears especially Malayan miners marvelous thing control On other appears those oppose control people interest themselves propaganda obviously value Patino figures correct Bolivla situatlon producer compared alaya Without international control project Bolivia mining industry would collapsed therefore Malaya chief rival would suspended production We would whilst mines belonging Chinese Malaya continued produce price Ll09 doubt Bolivia could Well Malayan miners price permanently controlled We permanent control contrary Malaya interests everything possible oppose tendency WLM I Page The governments United Kingdom United States joined Scheme nonvoting advisors Committee During period U S delegates predicted unrealistic pricing could consumsrs conduct research substitutes Although outbreak World War II insured demand Bolivian Japanese overran Southeast Asia argument today explain shift aluminum beverage production The International Tin Council place traces origins Havana Charter The Charter guidelines international commodity agreements Chapter VI The existence primary commodity surplus causin serious hardship producers The development threat widespread unemploy underemployment connection primary commodity These difficulties correct themselves market alleviate dislocation industry Any commodity agreement should assure adequate supply world demand stable prices Any commodity agreement should allow votes consum producers The commodity agreement should allow satisfaction demand economic sources The first International Tin Agreement drafted under auspices United Nations Conference Trade Develop The U S chose remain outside International Tin Council though allowed consumers The U S engaged compiling firateIc fiockpile thirty years later stockpile remains politically sensitive point Bolivia The total stockpile inventory stood today total nearly halved September To these figures perspective consider stockpile represented almost twice level world consumption The present stockpile world production measured O00 stands potent force marketplace ITA I empowered C purchase object defend range express agreed members By Council broke trying defend LV30 The Soviet Union flooded market unrestricted sales strategic stockpile having remained outside ITC U S S R stake control The Council broke trying absorb surplus Evidence division between producing countries existed incident should served warning present Council confronted s_gnlflcant producer wishes remain outside market control scheme price stabilization becomes risky business Once ITC refinanced rolled fairly smoothly through decades Tin consumption positive unspectacular exchange rates remained relatively stable ITC claimed production under WLM I Page umbrella Important elements present Agreement developed along ITA II required members contribute finance uffer stock ITA III imposed export quotas effect after Buffer Stock anager purchased In ITA IV allowed Council enter futures trading removed proviso deals London Metal Exchange It IT A IV price range which Council obligated defend shifted alayslan market prices quoted rlngglt plcul later kilogram Together ability trade futures allowed ITA IW Aoreement altered original nature ITC According ITA III Council longer market prevent volatility The Agreement clearly stated Council purpose assist economic growth producing countries uphold importauce producing countries manufacturing expanding their import purchasing power With hindsight these additions original IT A Council status speculator This allowed Buffer Stock anager unprecedented power One assist economic growth producing countries increase price Of course takes account whether increase revenue meant increased investment program producing countr whether money straightaway another Nonetheless would feeling settled Council particular Buffer Stock anager offlce Exchange become better speculator trader anyone Ring In conversations there universal acclaim Pieter Koning regard He first trader indeed But International Tin Agreement meant consumers By negotiations ITA V rolled around U S reconsidered former position commodity agree ments became member under Agreement Once member U S Bolivian delegates opposite views almost every issue The U S opposed every proposed increase price range renewing argument artificially prices encouraged substitution Even though I advocate commodity agreements there merit U S position Plant production aluminum average In periods production declined During World War II C Rations canned goods aluminum Even though aluminum enjoyed stead value SU S still below European price While consumption solder assured market niche microelectronics industry solder whole The which consumption grown chemicals stann flouride WLM I Page Continued releases strategic stockpile during U S membership ITC aggravated relations Bolivians The Malaysians agreed their producer competitors negotiated Memorandum Under standing limit disposal stockpile This enter market directly General Services Administration which administers stockpile rather GSA provides metal processing firms MacAlloy Elkem payment Ferro Alloy Swap Upgrading Program Since collapse ITC GSA probably released estimates This estimate based Ferro Alloy Program establishes payment credits instead tonnage totals Even though details contracts prices classified precipitous decline price since certainly suggests market GSA stockpile difference Thus roundabout fashion I brought early control Rather elaborate I story ITA VI newsletter The transition Agreement crucial comprehending ITC collapse I think better treated separately I waiting Jalme Bueno CONIIBOL longtime representatlve London Senor Bueno travellln Brazil Bolivia until returns May I ideas about Indonesla rejection forth brokers banker early moderate effect ITC default I reluctant express these though reservations should cleared As Received Hanover